The other night I attended the Chinwag Freeconomics Event held at the Slug and Lettuce in Soho. Nic Brisbourne of DFJ Esprit chaired the panel which consisted of:

Alan Patrick from Broadsight

Victor Keegan from The Guardian

Azeem Azhar from Open Capital Partners

Charlie Blake Thomas from Huddle

Bruce Daisley from YouTube

The debate centred on the extent to which people might in future be prepared to pay for online services they have until now obtained for free. Those in favour of ‘free’ argue that because digital goods have a low marginal cost they can be given away and profits made from advertising or from selling related high margin items (think of free digital music but expensive gigs and associated merchandise). In contrast, Alan Patrick has argued that free services are not sustainable because they have largely been subsidised by venture capital. This is likely to run out at some point soon and advertising revenues are only large enough to sustain the biggest players.

Bruce Daisely made the point that YouTube’s free video service now accounts for 10% of total bandwidth consumption – which knocks a big hole in the argument that the marginal costs of digital services are close to zero. Victor Keegan noted that the danger with free services such as Gmail is that there is no recourse to users should the service fail and their data be lost, though our research summarised here has identified a number of small firms who have ‘punched above their weight’ using free online tools. Azeem Azhar also reminded the audience that free services have encouraged major innovations such as open source software. The ‘freemium’ model seems a sensible compromise and Charlie Blake Thomas drew upon the example of Huddle which offers free services to minimise barriers to entry to its basic project management services, but charges for higher level services offering additional features and better security.

The audience seemed surprisingly open to the notion of paying for online services, and there was a good question about how small businesses were expected to compete with free services offered by competitors when they could expect little return from an advertising-based business model. What is clear is that significant change is on the horizon, as the online world is not immune from the pressures of global recession.